Fibonacci extension is a method that uses ratios that tend to repeat themselves in financial markets as a way to determine when a market peak or valley is more likely to occur (read previous article for more examples). The extension level from 2015 held for over 1 year (Blue lines/arrow), with two significant pullbacks during that year: one in August of 2015, and another in January of 2016.

Since breaking above the 2015 resistance level, the market has been on a great run, but it has just reached the next major Fibonacci extension from the 2007 peak (red lines/arrow). Extensions can be discredited or validated by the peaks and valleys that interact with the three middle Fibonacci lines. Notice on the chart above how the lows from January 2016 and October 2014 line up with the upper-middle red line, and how the 2007 peak lines up with the middle red line, and how the 2011 peak and November 2012 low aligns with the lower-middle red line. This alignment is really strong, and makes me take this extension level very seriously.

There are other factors that warrant caution too. The CAPE ratio is historically high. This ratio compares the earnings of corporations to the price of the stock market, and by this measure the market has only been more expensive in the late 1990s (during the internet bubble), and in 1929 just before the great depression. Additionally, the Volatility Index hit an all-time low last week. This measure is sometimes called the Fear/Greed index. And a low reading would tend to indicate high levels of greed and complacency.

Market Sectors are Recalibrating Post-Election
What we’re witnessing in the markets post-election has been a remarkable recalibration of market sectors. There are 9 broad sectors that our overall economy is divided into. Most of the time, they tend to move together with the overall direction of the market. But right now, that’s not the story. There are major divergences between the winners and losers.
The sectors that have seen the most dramatic gains are Financials, Industrials, Health Care, and Materials. The ones that have fallen hard include Consumer Staples, Utilities, and Technology. Both Energy and Consumer Discretionary have been somewhere in-between, about average. Also, worth noting is the big jump in interest rates. More on that later.

The backdrop of a Trump presidency makes these price moves understandable. Let’s take them one by one:

Industrials: Trump has promised to increase spending on the Military and to use the proceeds from taxes on repatriated corporate cash (that’s brought back from overseas) to fund the rebuilding of national infrastructure (roads, bridges, hospitals, airports, etc.). This bodes well for both the Defense & Aerospace element of this sector and the more general Industrial Equipment and Machinery elements. In addition, the states that truly carried him to victory were the “Rust Belt” states of Pennsylvania, Michigan, and Wisconsin, which more often vote democrat. If Trump maintains his promise to revitalize manufacturing, which is likely what brought these states over to his camp, then that will also be positive for Industrials.

Health Care: From 2012 through mid-2015, Biotech was arguably the hottest sector in the market by a wide margin. In September 2015 and August 2016, Hillary made statements about the prices of pharmaceuticals that suggested she might impose price controls onto the industry. Ever since […]

There’s something interesting going on with Russia. The VanEck Vectors Russia ETF’s (RSX) tight correlation with oil seems to have broken down over the last few weeks and looks like a bullish set up. In our commentary last month, we specifically mentioned avoiding emerging markets that were tied to oil because oil had already run up so much from its lows. But this month is different. Notice the tight correlation between Russia and oil from mid-May through the end of June in the chart below. Then the relationship breaks down through the month of July as oil fall about 20% while Russia stays breakeven or better. This makes us think that if oil bounces back at all this month, there could be a significant rally in Russian stocks. Some commentators have made the case that a recent tax overhaul for the oil and gas industry in Russia has improved their margins, which could be one reason for its resiliency. http://www.forbes.com/sites/kenrapoza/2016/07/28/tectonic-shifts-coming-to-russian-oil-industry/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix#472016622f7e

South Korea had a recent breakout above resistance, then pulled back and held support, and now looks poised to rally.

The Utilities sector has had a great run this year and we think the low interest rate environment and continued political and economic uncertainties will cause this sector to continue to be a favorite for investors who seek a safe haven and dividend yields.

The First Trust DJ Internet Fund contains many of the high-flying growth companies that draw so much media attention, with its largest holdings being Facebook, Amazon, Google, and Salesforce. Through this […]

The fallout from the Brexit vote last month has created some very interesting opportunities. One area of interest are the Asian exporting countries, specifically Taiwan (EWT), Indonesia (EIDO), and Thailand (THD). Our view is that the global economic climate favors countries like these over the near term. Landing on this group of countries was more of a logical process of elimination than anything else.

First, the strengthening of the dollar and yen because of the Brexit vote will likely put additional pressure on the already low-growth economies of the United States and Japan. So those are out.
The situation in Europe is still sensitive and uncertain. Some analysts and commentators see the Brexit vote as the first domino in a series of events that could take place over many years, including the breakup of the European Union, the dissolution of the Euro currency, and sovereign debt defaults among the weaker European countries. None of these things are immediate threats, but they are on the forefront of the minds of many investors and make the region unattractive to us at this time.
There are many emerging market economies whose success or downfall depends heavily on the price of oil. Because the price of oil has already had a big run up from its low and because the dollar has been strengthening, we prefer to avoid markets like Russia, Brazil, and others that depend on energy related commodities.

These factors leave exporting countries that are not sensitive to oil or in Europe as our favorite play this month. In such countries, their exports could stand to benefit from the strong dollar and yen while mostly avoiding the exposure to Europe or oil that could derail things.

New month, same story. For the third month in a row, the market has been in a sideways pattern, a neutral zone, that is neither bullish enough to break out nor bearish enough to break down. The chart below demonstrates some of the support and resistance levels we are watching on the FTSE All World Index that define this zone:

USMV is a Minimum Volatility ETF, which is designed to be fully invested in stocks, but to maintain a lower level of volatility. For instance, this fund currently has a beta of 0.68, which means that it has tended to be about 30% less volatile than the overall stock market historically.

Another one of the holdings is MGV, the Vanguard Mega Cap Value ETF. As the name suggest, this fund invests in many of the largest companies in the United States, companies that are mature and slower growing and provide a higher margin of safety than smaller, fast growing companies.

The rest of the holdings are sector-specific rather than broad-based. They include Utilities, Telecom, Medical Devices (Health Care), and Real Estate. All of these can be considered to be traditionally defensive equity sectors. The biggest risk among these is whether or not the Federal Reserve raises interest rates this month. Utilities and Real Estate tend to be sensitive changes in interest rates, and an increase in rates could negatively impact these sectors.

At the close of 2015, we got several bearish signals and positioned our portfolios to be almost neutral to the stock market by buying ETFs with inverse stock market exposure (SH, SDS). In other words, our net exposure to the stock market is now very near zero. If the market weakness continues through the first week of January, we expect to get additional sell signals.

These are the most bearish signals we’ve seen since April/May 2008. The All World Index, which reflects global economic conditions, looks very similar to early 2008. There’s rarely a perfect parallel in the stock market, but general patterns do tend to repeat themselves and the current conditions are shaping up to look a whole lot like the market top in 2007-2008. That doesn’t mean the decline will turn out the same, but it does warrant caution.

And there’s a lot more than just one chart. Many other things that tend to accompany market tops have occurred in the past year. Some of these include:

Declining earnings for several quarters

Peak margin debt

Declining transportation index

Flattening yield curve

Deteriorating market breadth

High priced IPOs

Elevated M&A activity

Falling commodity prices

Trendlines breaking down

Aging bull market

High yield debt dropping

Stretched PE valuations

Manufacturing index below 50

Monetary tightening

There are a lot of reasons to be defensive right now.

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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

With the recent terrorist attack in Paris and speculation that more attacks are to come throughout Europe and the US, many are wondering if the world is on the precipice of a new major military conflict. From an investor’s perspective, it begs the question, “what are some stocks that do well during wartime?”

Here are a few that I think could be interesting.

I’ve listed these in the order in which I would recommend buying them. Looking back at 2001, when the attack on the World Trade Centers happened and in the months following RTN, GD, NOC, and LMT all did very well. UTX and BA did not do well. Those two fell along with the rest of the market as the economy was in recession from bursting of the technology bubble. For that reason, BA and UTX would not be my first choice. TDG was not publicly traded at the time.

As far as just looking at the financial statistics, TDG is the fastest growing, but because it wasn’t around during the last major terrorist attack and because it balance sheet has more total debt than total assets, it is listed further down. LMT has somewhat poor financial statistics. The high price to book ratio and the high debt to equity indicate that they also have a much higher debt load than many of the companies. Also, their net profit margin is on the low end of the group. So, although I think LMT would do well during wartime, I like the top 3 companies more because of the strength of their financials.

The performance of these stocks on November 16th, after the weekend news from Paris, I think gives a unique insight and preview as to what […]

The market has been on quite a roller coaster ride the last 3 months. In August and September, our systems got widespread sell signals across the board. All the charts and indicators showed the typical characteristics of the early stages of a new major bear market. Because of that, for most of the month of October we were positioned defensively to protect against a market decline. But, instead, the market rallied ferociously with some serious velocity and magnitude. Unfortunately, because of our position we didn’t participate in the rally as many of our systems don’t get a new buy or sell signal until the end of each month.

So, with October ending, many of our strategies got signals to buy back into the market. We’re still a little skeptical of this rally; economic data hasn’t been great and the rally could just be enough to squeeze out the sellers before making another move down. Regardless of our opinions, we follow the rules of our strategies because that’s how we get an edge on the market over time.

So for the time being, we have an ‘all clear’ to move back into stocks. However, if the S&P falls below 2030, that’s where we would start to reduce our market exposure again.

As for the trades we made, our Sector Rotation system purchased Software (IGV), Real Estate (IYR), and Leisure (PEJ). Other systems moved into the ETFs that follow the broad market (IVV, FEX).

Leisure

The Leisure sector is all about the holidays. This fund invests heavily in consumer discretionary companies like Starbucks and Disney as well as many Airline and Travel related companies. We think that low fuel costs will continue to boost the airline and travel industry and help this […]

A lot of commentators on the stock market and financial advisors have pointed to a lot of different factors to explain why the market has been so flat this year. The factors include earnings and valuations, growth rates, fed expectations, international risk, and so on. And there is some truth in all these arguments. I’d like to point out a factor that I’ve not seen anyone discuss. It’s a technical analysis factor that has been in the making for over 15 years. What I’m talking about is a long term Fibonacci extension. For those that aren’t familiar with Fibonacci, it is a series of numbers and ratios that frequently occur throughout nature, and in the stock market as well. Part of the reason why this analysis works is due to the effect of self-fulfilling prophecy, that is, there are so many people watching Fibonacci lines that their pervasiveness makes them relevant. Fibonacci analysis can be used for retracements (predicting where a pullback will find support) as well as extensions (predicting where an uptrend will run into resistance). To do a Fibonacci extension, what I like to do is establish the bottom line on an obvious low point. After that, I pull the top line upward above the current market price until the 3 middle lines suddenly line up with a lot of previous highs and lows. Look at this example:

By establishing the bottom line on the 2009 low and then pulling up the top line until the middle lines suddenly touch several highs and lows, a person could have predicted that the S&P would likely run into resistance at 1,350 as early as Fall 2010. The next chart I’m about to show you is the […]

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